5 Most Popular Options Trading Strategies

Options trading is a widely used approach in Indian derivatives markets. Understanding various trading strategies can help market participants assess different market conditions. This article explores five commonly used options trading strategies and their key aspects.

Contents

• Covered Call Strategy
• Protective Put Strategy
• Long Call Strategy
• Long Put Strategy
• Bull Call Spread Strategy
• Conclusion
• FAQs

Covered Call Strategy

As part of the covered call strategy, you hold a long position in an underlying asset and simultaneously write (sell) a call option on the same asset. With this approach, traders receive a premium for selling the call option while continuing to hold the underlying asset.

Key Points:

• Asset Ownership: You have to own the stock or property you’re trading.
• Call Writing: You can make a bonus by selling a call option, which can help if the stock price drops.
• Limited Upside: You can only make as much money as the strike price plus the extra.
• Neutral Outlook: It works best for traders with a neutral to slightly bullish market view.
• Exit Strategy: You might have to sell the asset at the strike price if the stock price exceeds it.

Read Also: Risk Management In Options Trading

Protective Put Strategy

To protect against possible losses, people use a protective put plan. This strategy involves holding the underlying asset while purchasing a put option to manage downside risk.

Key Points:

• Downside Protection: Buying a put option protects you against losing too much if the asset’s price goes down.
• Cost Consideration: If the asset increases in value, the price paid for the put option cuts into the total profit.
• Flexibility: This approach controls buyers and lets them benefit from any gains while lowering risk.
• Neutral to Bullish Bias: Good for investors who are bullish on their stock but want to protect themselves against sudden drops.
• Exit Timing: If the market goes against you, you can sell or use the put option.

Long Call Strategy

Buying a call option is part of the extended call plan. It gives the investor the right to buy the underlying asset at the strike price within a specific time. Traders use this approach when anticipating potential upward movement in the underlying asset.

Key Points:

• Leverage: Allows you to benefit from possible gains without buying the whole stock.
• Limited Loss: The biggest loss that can happen is the cost of the call option premium.
• Profit Potential: The gains can be significant if the asset price goes above the strike price.
• Market Outlook: The best for bullish traders who think prices will go up a lot.
• Time Decay: The option’s value decreases as the end date gets closer, so the market needs to move at the right time.

Long Put Strategy

A long put strategy involves purchasing a put option to gain exposure to potential declines in the underlying asset’s price. This strategy is like a long call, but it’s used when prices decrease.

Key Points:

• Downside Gain: It may give you the chance to make money if the underlying asset’s price goes down.
• Risk Management: It’s a controlled risk plan because the most that can be lost is the paid premium.
• Hedging: People who trade often use it as a backup for other interests they have.
• Market Outlook: Suitable for traders who are bearish on the market and expect it to drop significantly.
• Expiration Factor: Timing is critical with options because they end if the expected move doesn’t happen.

Read Also: How Is The Premium Of An Options Contract Calculated

Bull Call Spread Strategy

When trading options, the bull call spread approach involves buying a call option with a lower strike price and selling another call option with a higher strike price. This reduces the net premium cost.

Key Points:

• Cost Efficiency: The premium from the sold call helps to cover some of the cost of the bought call.
• Limited Risk: The most you can lose is the net premium you paid for the spread.
• Capped Profit: This approach can work in a mildly bullish market despite the small possible gain.
• Market Outlook: Ideal when you think the underlying asset will increase by a small amount.
• Management: Picking the correct strike prices is essential to ensure equal costs and possible profits.

Conclusion

These five options trading strategies highlight different ways market participants approach derivatives trading. Understanding the risk factors and contract specifications of each strategy is crucial for effective decision-making in the Indian market. Traders can adapt their strategy to different market situations by mixing these techniques with good risk management techniques.

Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.

FAQs